Will Electric Cars Transform The US Vehicle Market? - Belfer Center ...

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Will Electric Cars Transform The US Vehicle Market? - Belfer Center ...

Energy Technology Innovation Policy Research GroupWill Electric Cars TransformThe U.S. Vehicle Market?An Analysis of The Key DeterminantsBy Henry Lee and Grant LovelletteJuly 2011

Will Electric Cars Transform the U.S. Vehicle Market?An Analysis of the Key DeterminantsBy Henry Lee* * and Grant Lovellette ††Energy Technology Innovation PolicyBelfer Center for Science and International AffairsHarvard Kennedy School, Harvard University79 John F. Kennedy StreetCambridge, MA 02138USABelfer Center Discussion Paper 2011-08July 2011* Director, Environment and Natural Resources Program; Co-Principal Investigator, Energy Technology InnovationPolicy research group; Senior Lecturer in Public Policy, Harvard Kennedy School.† Principal Researcher, Masters in Public Policy 2010, Harvard Kennedy School.

CITATIONThis paper may be cited as: Lee, Henry and Lovellette, Grant, “Will Electric Cars Transformthe U.S. Vehicle Market? An Analysis of the Key Determinants,” Discussion Paper 2011-08,Cambridge, Mass.: Belfer Center for Science and International Affairs, July 2011.Comments are welcome and may be directed to Henry Lee at the Belfer Center for Scienceand International Affairs, Harvard Kennedy School, Harvard University, 79 JFK Street,Cambridge, MA 02138, henry_lee@harvard.edu. This paper is available atbelfercenter.org/energy.DISCLAIMERThe views expressed within this paper are the authors’ and do not necessarily reflect those ofthe organizations they are affiliated with, its members, nor any employee or persons acting onbehalf of any of them. In addition, none of these make any warranty, expressed or implied,assumes any liability or responsibility for the accuracy, completeness or usefulness of anyinformation, apparatus, product or process disclosed or represents that its use would not infringeprivately owned rights, including any party’s intellectual property rights. References herein toany commercial product, process, service or trade name, trade mark or manufacturer does notnecessarily constitute or imply any endorsement, or recommendation or any favoring of suchproducts.

ENERGY TECHNOLOGY INNOVATION POLICY (ETIP)The overarching objective of the Energy Technology Innovation Policy (ETIP) researchgroup is to determine and then seek to promote adoption of effective strategies for developingand deploying cleaner and more efficient energy technologies, primarily in three of the biggestenergy-consuming nations in the world: the United States, China, and India. These threecountries have enormous influence on local, regional, and global environmental conditionsthrough their energy production and consumption.ETIP researchers seek to identify and promote strategies that these countries can pursue,separately and collaboratively, for accelerating the development and deployment of advancedenergy options that can reduce conventional air pollution, minimize future greenhouse-gasemissions, reduce dependence on oil, facilitate poverty alleviation, and promote economicdevelopment. ETIP's focus on three crucial countries rather than only one not only multipliesdirectly our leverage on the world scale and facilitates the pursuit of cooperative efforts, but alsoallows for the development of new insights from comparisons and contrasts among conditionsand strategies in the three cases.

ACKNOWLEDGEMENTSWe would like to thank Robert Frosch, Sarah Jordaan, Richard Zeckhauser, ErichMuehlegger, and William Hogan for their helpful comments and insights. Eric Lu wasenormously helpful in finding data and information. Amanda Swanson oversaw the formattingand publication. We are especially grateful to Ashley Gagné for her patience and help in editingand preparing the manuscript.We also appreciate the encouragement and insights from the U.S. Department of Energy, theEnvironmental Protection Agency, Nissan Motors, Exxon, and the Alliance of AutomobileManufacturers. The analysis and findings, however, contained in this manuscript are entirelythose of the two authors and do not necessarily represent those of the people, agencies, orcompanies who gave so generously of their time.

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08EXECUTIVE SUMMARYFor the past forty years, United States Presidents have repeatedly called for a reduction inthe country’s dependence on fossil fuels in general and foreign oil specifically. Strongerefficiency standards and higher taxes on motor fuels are a step in this direction, but achievingeven greater reductions in oil consumption will require changing the way Americans power theirtransportation system. Some officials advocate the electrification of the passenger vehicle fleet asa path to meeting this goal. The Obama administration has, for example, embraced a goal ofhaving one million electric-powered vehicles on U.S. roads by 2015, while others proposed amedium-term goal where electric vehicles would consist of 20% of the passenger vehicle fleet by2030—approximately 30 million electric vehicles.The technology itself is not in question—many of the global automobile companies areplanning to sell plug-in hybrid electric vehicles (PHEVs) and/or battery electric vehicles (BEVs)by 2012. The key question is, will Americans buy them?The answer depends on four additional questions: 1. Is the cost of purchasing and operatingan electric vehicle more or less expensive than the cost of a comparable conventional gasolinepoweredvehicle? 2. Are the comparative costs likely to change over the next twenty years? 3.Do electric vehicles provide the same attributes as conventional cars, and if not, do thedifferences matter? 4. Will electric car owners be able to access the electricity needed to powertheir vehicles?This paper attempts to answer these four questions.There are two basic categories of electric vehicles—electric vehicles (BEVs), which runsolely on the electric energy stored in the battery, and plug-in hybrid electric vehicles (PHEVs),which operate on both a rechargeable battery and a gasoline-powered engine. With both types ofvehicles, the major incremental expense compared to a conventional vehicle is the cost of thebattery. While the industry is working hard to reduce these costs, a battery in a BEV with anaverage range of 60-80 miles costs between $10,000 and $15,000. Hence, this paper comparesthe net present lifetime cost of electric vehicles with that of conventional cars, both at today’scosts and at projected future costs. The paper also runs comparison scenarios with differentassumptions about gasoline and electricity costs, battery costs, consumer discount rates, andvehicle efficiency levels.i

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08CostsThis paper finds that, at 2010 purchase and operating costs, a PHEV-40 is $5,377 moreexpensive than an internal combustion engine or ICE, while a BEV is $4,819 more expensive. Inother words, the gasoline costs savings of electric cars over the cars’ lifetimes will not offsettheir higher purchase prices.In the future, this cost balance may change. If one assumes that over the next 10 to 20 yearsbattery costs will decrease while gasoline prices increase, BEVs will be significantly lessexpensive than conventional cars ($1,155 to $7,181 cheaper). Even when the authors use veryhigh consumer discount rates, BEVs will be less expensive, than conventional vehicles althoughthe cost difference decreases. PHEVs, however, will be more expensive than BEVs in almost allcomparison scenarios, and only less expensive than conventional cars in a world with very lowbattery costs and high gasoline prices. BEVs are simpler to build and do not use liquid fuel,while PHEVs have more complicated drive trains and still have gasoline-powered engines.Will Consumers Purchase Electric Vehicles?Consumers purchase cars based on how they value multiple attributes. They care aboutperformance, aesthetics, reliability, and many other features. Cost is an important consideration,but not the only one. Electric vehicle manufacturers have worked hard to ensure that electric carsare comparable over a wide range of attributes, but BEVs are plagued by limited range (thenumber of miles they can be driven before they need to be recharged), and consumers remainworried about the reliability of both BEVs and PHEVs relative to conventional vehicles. Thelatter problem will gradually disappear as motorists become more accustomed to electric cars,but range anxiety is likely to remain until battery technology improves. One can argue that suchanxiety is irrational, since urban drivers, on average, drive less than 20 miles per day, but no onehas ever asserted that consumers base their car purchases solely on rational calculations. Onemight contend that the value of greater range is (approximately) the $4,000 price premiumconsumers will pay for a PHEV over a BEV, according to our model. Regardless, the bottom lineis that the range issue will significantly affect consumer choice and is a major barrier to thepenetration of electric vehicles.ii

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08Is the Electrical Infrastructure Available?To power an electric vehicle, consumers must have the ability to connect their vehicle to asource of electricity, the utility must have the capacity to transmit and distribute this additionalpower and sufficient electricity generation capacity must exist. If the private sector is unwillingto meet these three conditions (i.e. providing 1. charging equipment, 2. distribution capacity, and3. electricity generation), then governments must intervene. However, this paper finds no clearmarket failure that would require or justify such interventions.The charging equipment is not expensive, and it would not be difficult for households andcommercial enterprises to install such equipment. The adequacy of the distribution andgeneration systems will differ from one state to the next, and the electric utility industry willhave the ability and time to make the necessary investments to keep up with the increasingdemand from electric vehicles. Private industry may not be willing to invest well ahead ofdemand, but it is not clear that building swaths of underused public charging stations is theoptimal way to subsidize and accelerate the purchase of electric vehicles.Can the United States Meet its Electric Vehicle Goals?Significant penetration of electric vehicles can only occur if American consumers decide toforego purchasing gasoline-powered cars and opt to buy electric vehicles. For this to happen on alarge-enough scale to make a difference in oil consumption or pollution emissions, electric carsmust be competitive with conventional cars across a wide range of attributes, including totalcosts (purchase, operations, and maintenance) and range. For this scenario to occur, gasolineprices will have to increase to $4.50-$5.50 per gallon, and battery technology will have toimprove significantly, providing increased range at decreased cost. Both scenarios are possible.Government assistance in the form of continued support for research and demonstration of newbattery technologies and a willingness by Congress to place a cost on oil imports andconventional and unconventional air pollutants would accelerate this process.iii

TABLE OF CONTENTSEXECUTIVE SUMMARY ................................................................................................................................... iIntroduction ................................................................................................................................................... 11. Technology Choices .................................................................................................................................. 5Electric Vehicles ....................................................................................................................................... 62. Cost Comparison ....................................................................................................................................... 9Batteries .................................................................................................................................................... 9Fuel Costs ............................................................................................................................................... 12Discount Factor ...................................................................................................................................... 13Results ..................................................................................................................................................... 143. Comparing Attributes .............................................................................................................................. 184. Adequacy of Infrastructure ..................................................................................................................... 23Conclusion .................................................................................................................................................. 30Appendix A: Cost Model at Current Energy Prices .................................................................................... 33Appendix B: Monte Carlo Simulation and Sensitivity Analysis ................................................................ 34

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08IntroductionSpurred by concerns over conventional and unconventional air emissions and theavailability of future oil supplies, government officials in the United States, China, and Europehave embraced electric vehicles as a zero emission alternative to gasoline-powered vehicles. Infact, the Obama administration has set an ambitious goal of having one million electric cars onthe road by 2015. 1 Echoing this optimism, many major automobile companies have, or will have,versions of the electric car in their showrooms by the end of 2012. Nissan Motors is placing a sixbillion dollar bet that there will be a growing market for such vehicles, and Congress has enactedgenerous subsidies to encourage their production and adoption.Proponents tout electric vehicles as a potential solution to many problems. To thoseworried about the United States’ continued reliance on imported oil, the electric car promises toreduce oil consumption and enhance U.S. energy security. To those worried about climatechange, electric cars, especially in a grid powered increasingly by renewable energy, couldreduce greenhouse gas emissions. To those worried about the United States’ competitive positionin a world seeking green technologies, electric vehicles could stimulate jobs in industries rangingfrom batteries to smart grids to the vehicles themselves. Finally, to states and municipalities thatare struggling to meet ever more stringent standards for conventional air emissions, such as smallparticles and nitrogen dioxide, electrifying the transport sector may enable their communities tomeet new, tougher emissions standards. These combined interests may form a potentconstituency pushing for greater electrification.After careful analysis, each of these perceptions may seem optimistic, but several trendsexist that cannot be ignored. As emerging markets such as China and India enjoy increases in percapita incomes, world demand for passenger vehicles will grow. The United States had about256 million highway-registered vehicles in 2008, 2 while China has about 128 million privatemotor vehicles, 3 and India has more than 40 million. 4 This will change over the next twenty1 “Vice President Biden Announces Plan to Put One Million Advanced Technology Vehicles on the Road by 2015.”News. Department of Energy. January 26, 2011. Accessed online at http://www.energy.gov/news/10034.htm.2 “Table 1-11: Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances.” National TransportationStatistics. Accessed online athttp://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html.3 “168 mln motor vehicles on China's roads, up 5% year-on-year,” XinhuaNet. Accessed online athttp://news.xinhuanet.com/english/2008-10/08/content_10166911.htm.1

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08years. In 2010, there were about 750 million passenger vehicles in the world, and by 2030, thisnumber is predicted to grow to 1.1 billion. By 2050, it could be as high as 1.5 billion. It would beunrealistic to assume that a passenger fleet of this size will only be populated by gasolinepoweredvehicles. One would have to assume either that the global transportation fleet will betwice as efficient in 2050 as it is today, or that the world’s oil supply will be sufficient to meetthe demand of a fleet that is twice as large.The U.S. House of Representatives, the President, and numerous state governments haveset greenhouse gas reduction goals for the 2040-2050 time period of 60%-80% below 2005levels. One can argue that these goals are too ambitious or even unrealistic. Nevertheless, if theU.S. aims to realize them, must change how it fuels its transportation sector, since this sectoraccounted for about 27% of total U.S. greenhouse gas emissions in 2008 and has been thefastest-growing source of U.S. greenhouse gas emissions since 1990. 5Finally, if U.S. policymakers decide to promote reduced oil consumption, they mustcontend with the fact that 70% of the oil consumed in the United States is used for transportation,and of the oil used for transportation, about 70% is consumed by passenger vehicles. A strategyof reducing oil consumption that does not involve significant reductions in gasoline demand willnot be effective.In the past three years, many studies, papers, and reports have examined various promisesand challenges of introducing electric vehicles into the U.S. automobile fleet—includingenvironmental impacts, impacts on the electrical grid, and economic costs. They have looked at avast range of future technologies, both for the vehicle itself and for the components of thevehicle, especially the battery. The purpose of this paper is more limited—we pose the question,under what circumstances is the United States likely to see large-scale adoption of electricvehicles over the next twenty-five years? What factors might influence a significant number ofconsumers to purchase or reject electric vehicles?An easy answer is that it depends on the cost of electric vehicles as opposed to the cost ofconventional vehicles. However, this leads to the question—the cost to whom? Inherently, thepublic and private sectors will share the costs. The U.S. government presently provides a subsidy4 “India Car Sales Touch Record High.” Article. The Wall Street Journal Digital Network. September 9, 2010.Accessed online at http://online.wsj.com/article/SB10001424052748703453804575480881344386638.html.5 “Basic Information: Greenhouse Gas Emissions from Transportation.” United States Environmental ProtectionAgency. September 14, 2010. Accessed online at www.epa.gov/oms/climate/basicinfo.htm.2

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08of up to $7,500 per electric vehicle. 6 Hence, a $40,000 vehicle costs the consumer $32,500, andthe taxpayer is paying the $7,500 difference. The Electric Vehicle Deployment Act would, ifpassed, increase this subsidy to $9,500 for the first 100,000 electric vehicles sold in selecteddeployment communities. 7 Theoretically, consumers and producers may split the subsidy, but inthis case, almost all of it is passed onto consumers. The Electrification Coalition has written areport requesting Congress to enact a series of subsidies that they estimate will cost $121 billionbetween now and 2018 8 (though we find their estimate of the costs of the subsidies they proposeto be rather conservative). The rationales for this request are that the EV industry is unlikely todevelop rapidly without government assistance and that most of the benefits of electric carsaccrue to society generally, so it is appropriate for taxpayers to pay for these benefits.In addition, electric utilities in some regions will be asked to add additional generationcapacity and to upgrade their distribution system. Will this cost be assumed by all ratepayers, orwill public utility commissions identify mechanisms whereby those who benefit pay—i.e. willonly the owners (or prospective owners) of electric vehicles pay the additional cost? This issuebecomes even more complicated when one contemplates the introduction of smart gridtechnologies that will have the capability to stagger the charging of electric vehicles throughoutthe evening and night, thus optimizing the use of the grid. Under some scenarios, the electricitystored in the vehicles could be sold back to the grid to meet peak demand.In summary, the public and the private sectors will share the costs of transitioning toelectric vehicles. The size of these costs could be large, and there has been no rigorous attempt todevise guidelines or principles on how this division should be made. At minimum, the publicsector should calculate the benefits and costs of promoting the transition to electric vehicles.How large are the energy security benefits? How great are the benefits to U.S. competitiveness?How significant are the environmental benefits to the country? Is the cost to the public ofstimulating this transition equal to, less than, or greater than the benefits?Identifying and valuing both public and private benefits and costs will be an ongoingchallenge, as both the total costs and the technologies evolve. At the moment, the government isproviding subsidies without any real effort to estimate the value of the benefits that the subsidies6 “Plug-In Electric Vehicle Credit (IRC 30 and IRC 30D).” Internal Revenue Code 30 and 30D. IRS. May 24, 2011.Accessed online at http://www.irs.gov/businesses/article/0,,id=214841,00.html.7 Motavalli, Jim. “Electric Car Group Looks for Legislative Boost.” The New York Times. June 23, 2010.8 Electrification Coalition, “Economic Impact of the Electrification Roadmap,” p. 10. April 2010. Accessed online athttp://www.electrificationcoalition.org/sites/default/files/SAF_1249_EC_ImpactReport_v06_proof.pdf.3

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08will generate. Is subsidizing electric cars a cost-effective option to reduce greenhouse gases?What are the energy security benefits of substituting one million gasoline vehicles with onemillion electric vehicles? How many incremental jobs are actually created if Americanconsumers replace their gasoline-powered vehicles with electric substitutes, and at what cost perjob?From the private perspective, the analytic process is identical. What are the benefits to theconsumer of purchasing an electric vehicle? The answer will be very different in a world of $3per gallon gasoline as opposed to a world of $6 per gallon gasoline. Furthermore, the market willreward consumers for consuming less oil, since the higher the price of oil, the lower the need forpublic expenditures. Hence, the division of costs between the public and private sectors will beheavily influenced by expected oil prices.Moreover, what private benefits will attract consumers to purchase electric cars?Alternatively, are most of the benefits in electrifying the passenger car fleet generated in theforms of positive externalities derived and negative externalities avoided? Only a small minorityof Americans are likely to be willing to pay a several thousand dollar premium in order to beperceived as greener than their neighbors. In terms of storage, range, and reliability, today’sconventional gasoline-powered vehicles are perceived as superior to electric vehicles. Hence,most of the incremental costs to spur the penetration of electric vehicles, at least in the near-term,are likely to fall on the public sector. Certainly, technologies can improve. Batteries may becomecheaper and lighter, and charging equipment can become more versatile; but these improvementsare still developing.Theoretically, values can change. Americans may decide to value small electric vehiclesas second cars for commuting to work or picking children up from school. However, history hasshown that changing consumer preferences is often a daunting task.We begin this paper by defining what we mean by the term “electric car.” We analyze thecosts in comparison with both conventional internal combustion engines (ICE) cars and hybridcars over a broad spectrum of assumptions. Costs are only one of many attributes by whichconsumers compare vehicles. Range, reliability, performance, and style are weighed as well. Weassess how these additional attributes may affect consumer choice. We then identify the issuessurrounding the infrastructure needed to charge electric vehicles. In the final section, we makesome preliminary recommendations.4

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-081. Technology ChoicesIf the goal is to reduce gasoline consumption in the passenger vehicle sector significantly,there are three basic options—reducing vehicle miles traveled, improving the efficiency of thefleet, and substituting other forms of energy for gasoline. Studies have shown that gasoline priceswould have to rise to very high levels before they would result in considerable reductions indriving. 9 The United States has adopted more ambitious efficiency standards for new vehicles,but the 2016 standard of 36 miles per gallon would have to double to meet the carbon and oilconsumption goals set by the Obama administration. This may be feasible, but the technologiesto achieve such a goal without major reductions in vehicle size and performance have yet tomaterialize.The final option is to develop and use substitute fuels. These might include compressednatural gas (CNG), hydrogen, biofuels, or electricity. This paper will only focus on electricity,using projections for improvements in the efficiency of internal combustion engine vehicles(including hybrid electric cars) as points of comparison. With the prospect of a growingdifferential between the price of gasoline and natural gas, there is a growing interest in the use ofCNG as a substitute for gasoline. Interestingly, this option will face many of the same problemsconfronting electric cars—high initial costs, the need to build a new fuel infrastructure, andlimited range. An analysis comparing the economics and attributes of electric and CNG-poweredvehicles would be valuable, but is outside the scope of this paper.Each of these three options to reduce gasoline consumption suffers from major practicaland/or institutional constraints. Reducing VMT involves significantly increasing the price ofgasoline or the price of accessing the highways. Improving efficiency requires either substantialgovernment intervention into the car market or that consumers change their purchasing behavior.Changing fuels will require developing new infrastructure to provide these alternative fuels. Allthese options are fraught with political and economic challenges. Unfortunately, in the energysphere, there are many more examples of failed technological or programmatic initiatives thansuccesses. It is also true, however, that policies that are politically unacceptable or economicallyirrational today might be feasible tomorrow.9 Morrow, W. Ross, Kelly Sims Gallagher, Gustavo Collantes, and Henry Lee. “Analysis of Policies to Reduce OilConsumption and Greenhouse-Gas Emissions from the US Transportation Sector.” Energy Policy 38, no. 3 (March2010): 1305-1320.5

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08Mandates for non-gasoline fueled vehicles only apply to new vehicles; thus, it would takea decade or more to alter the vehicle fleet. If people started buying significant numbers of nongasoline-fueledvehicles in 2016, the country would not see the full result until after 2030. Eventhis scenario may be optimistic, since not all consumers will purchase the electric car or even themore efficient ICE, if they are significantly more expensive than an older used car. Instead, theymay hold onto their less efficient cars, hoping to extend their useful life.Electric VehiclesWhat is an electric vehicle (EV)? There are several varieties. The two most common arebattery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs), and there areseveral varieties of the latter. For the sake of this paper, a conventional hybrid (HEV), such as aToyota Prius, which is capable of drawing some of its energy from an electric battery, but notfrom the electric grid, will not be considered an electric vehicle.BEVs run solely on chemical energy stored in rechargeable electric battery packs. Theyhave a theoretical average range of around 100 miles (though some BEVs have ranges of up to250 miles), and their performance can mirror that of a conventional vehicle.BEVs have existed since the birth of the American automobile industry. In fact, at thedawn of the twentieth century, consumers could choose between three different propulsiontechnologies: 1. a steam powered internal combustion engine, which was fast and inexpensive,but required a long time to start and had to be refilled with water every few miles; 2. a gasolinepowered engine (ICE), which was dirtier, even more difficult to start, but could travel longdistances quickly and without refueling, and 3. a vehicle with an electric motor, which was quietand clean, but slow and expensive.Henry Ford and Thomas Edison were friends, and Ford was very attracted to the electricoption, but opted to go with the gasoline-fueled car, primarily because it could travel longerdistances between refueling. In the end, the market rejected electric cars in part because of cost,but more so because of their limited range.Highway-capable BEVs are not yet in widespread use anywhere in the world, althoughthe Israeli and Danish governments have announced aggressive programs to accelerate theirpenetration. Gasoline prices in both countries as of January 2011 were above $7.70 per gallon, 1010 “Europe’s Energy Portal.” Accessed at http://www.energy.eu/#domestic.6

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08and both countries are small and have high population densities. 11 While several companiesproduce BEVs in small numbers—for example, BMW, Mitsubishi, Tesla, and Smart—onlyNissan Motors has presented a detailed roadmap for selling BEVs to a wide customer base. TheNissan Leaf debuted in the fall of 2010, and the company hopes to sell 5,000 vehicles in theUnited States in 2011. There are several smaller companies, as well as a couple of largermanufacturers, that are planning to market BEVs by the end of 2012. Most companies, however,are betting that there will be a much stronger market for plug-in hybrids. The trade-off will bebetween cost and range. BEVs involve fewer parts and thus are predicted to be less expensive,but their reduced range—about 70-100 miles—is considered by some to be a showstopper.All of the BEVs that will enter mass production in the near-term will follow thetraditional model of automobile ownership—the consumer pays the purchase price for the carand is responsible for maintenance and energy costs. Alternative purchasing agreements arepossible, such as the consumer buying the car and leasing the battery separately, but these kindsof alternative arrangements do not seem to be a feature of the first generation of mass-producedBEVs.The second EV option is a plug-in hybrid electric vehicle (PHEV), with batteries that canbe recharged by connecting a plug to an electric source, similar to a BEV. Unlike BEVs, when itsbattery is depleted, a PHEV is capable of running on a small conventional motor. Hence,consumers’ range anxiety is substantially reduced. One often sees the acronym “PHEV”followed by the average number of miles that the PHEV can be driven on battery power alone.The U.S. Energy Independence and Security Act of 2007 defined a plug-in electric drive vehicleas a “vehicle that (A) draws motive power from a battery with a capacity of at least fourkilowatt-hours; (B) can be recharged from an external source of electricity for motive power, and(C) is a light-, medium-, or heavy-duty motor vehicle or non-road vehicle.” 12Depending on their design, PHEVs can operate as a series hybrid, a parallel hybrid, or aseries-parallel hybrid. In a series hybrid, an internal combustion engine powers a generator,which in turn powers an electric engine (and may send excess energy to a battery), which thenpowers the vehicle’s wheels. A parallel hybrid (for example, most of Honda’s current hybrid11 “Our gas costs 25% more than in Europe.” The Jerusalem Post. January 25, 2011. Accessed athttp://www.jpost.com/Business/Globes/Article.aspx?id=205075.12 “Energy Independence and Security Act of 2007.” U.S. Congress. April 1, 2010. Accessed online athttp://www.govtrack.us/congress/billtext.xpd?bill=h110-6.7

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08vehicles) can simultaneously power the vehicle’s wheels from both the internal combustionengine and an electric drive engine. Series-parallel hybrids (i.e. most of the hybrids offered byFord, Lexus, Nissan, and Toyota) can operate in either series or parallel mode, depending ondriver preference and/or maximum energy efficiency. Most aftermarket PHEV conversions andthe Chevrolet Volt are series-parallel hybrids.While car companies have been experimenting with prototype PHEVs, they have onlybegun to invest serious money into this option in that past few years. Renault in Europe andBYD in China have already released mass-produced PHEVs to the public. BYD released aPHEV compact sedan in Europe in 2010 and plans to release a similar vehicle in the UnitedStates in the fall of 2011. Additionally, Ford, Toyota, and Volkswagen have announced theirintentions to begin producing and selling PHEVs by 2012.Probably the most familiar PHEV is the Chevrolet Volt, which went on sale in the fall of2010. The Volt is a PHEV-40, which means that it can drive up to an estimated 40 miles onpower from the battery alone. After depleting the battery, it can drive an additional 350 miles ongasoline, so range anxiety is much less of a problem. Its efficiency while burning gasoline is 40MPG, and its initial price after the $7,500 tax rebate is $32,780. 13 The Chevy Cruze—one ofGM’s best selling small cars—has many of the same attributes of a Volt, but is priced almost$14,000 less.No one doubts that the auto industry can build electric cars, but the key question is, willconsumers buy them? The answer depends on several factors—how does the cost of an electricvehicle compare with a similar model of a conventional car?If an electric car costs more, what value will the consumer obtain for the extra cost? Asnoted earlier, a disproportionate percentage of the value of today’s electric cars will be in theform of reduced externalities—economic value that the individual consumer has difficultycapturing. Additionally, for many consumers, the lack of range is a significant cost.Technologies are likely to improve over the next decade, and thus the private benefits mayincrease.Recharging an EV will require an infrastructure that is readily available (including therecharging equipment and outlets), an upgraded electric distribution grid, and sufficientgeneration capacity to meet the additional demand. As with so many aspects of the electric car,13 Cheverlot, “2011 Chevy Volt.” Accessed online at http://www.chevrolet.com/volt/.8

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08the availability of this infrastructure depends on a number of uncertainties. How fast will electricvehicles penetrate the fleet? If slowly, then the market will not want to invest in chargingequipment and wire upgrades that are subsequently stranded for many years. Will electric carsales be evenly distributed across the country, or disproportionately located in certain areas, suchas the two coasts? Since the conditions of the grid and the adequacy of generating capacitydepend on regional variables, one will need to look at this issue at least from a state perspective,if not from that of individual utility franchises. Finally, one has to ask, when will consumers berecharging their vehicles? There is a big difference between scenarios in which a high percentageof consumers charge their vehicles at 7:00 p.m. and ones in which a majority wait until midnight.We will now look at these three factors, beginning with costs.2. Cost ComparisonWe have developed a simple costing model that incorporates a number of assumptions.The model’s results are quite sensitive to these assumptions, and there is substantial uncertaintysurrounding most of them. Hence, definitive statements on the comparative price of electricvehicles in 2025 do not rest on a robust foundation. We compare the economics of four types ofvehicles—conventional internal combustion engine cars (ICEs), conventional hybrids (HEVs),battery-only electric vehicles (BEVs), and plug-in hybrid vehicles (PHEVs), and we considerseven scenarios: 1. approximate cost estimates as they exist in 2010-2011; 2. a conservativeestimate of likely (real) costs in 2025-2030; 3. a low battery cost of $150 per kWh; 4. a high oilprice scenario; 5. a scenario in which the discount factor is 30%; 6. a scenario in whichelectricity prices rise to $0.24 per kWh; and 7. a scenario in which the efficiency of conventionalcars reaches 50 MPG and the efficiency of HEVs reaches 75 MPG.Before looking at the results of our calculations, it is worth examining the three factors—battery costs, fuel costs, and discount rates—that have the greatest impact on our results.BatteriesIn EV batteries, power refers to the rate of energy transfer from the battery to the wheels,measured in kilowatts. Greater power equals better acceleration and performance. As a way tocompare with an ICE, 100 horsepower is equivalent to 75 kilowatts. 14 Energy, measured in14 Electrification Coalition, “Electrification Roadmap,” p. 74. November 2009. Accessed online athttp://www.electrificationcoalition.org/sites/default/files/SAF_1213_EC-Roadmap_v12_Online.pdf.9

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08kilowatt-hours (kWh), is a measure of the storage capacity of an EV’s battery. Hence, all elsebeing equal, the higher the kWh capacity of a battery pack, the farther a vehicle can be drivenbetween charges. Comparing kWh of electricity with gasoline, a car with a 15-gallon tank hasusable energy capacity equivalent to a BEV with a battery pack of 135 useable kWh, 15 whichwould be equivalent to a pack fifteen times that contained in the Chevrolet Volt. 16In over a year of interviewing authorities and reading studies, we found no consensus onthe cost of batteries in the future, or even the cost today. Estimates ranged from as high as $875per nominal kWh 17 to below $200 per kWh. In our calculations, we start with an estimate of$600 per kWh as today’s cost, which is the figure contained in the Electrification Coalition’sstudy. 18 The coalition consists of electric vehicle advocates, and their estimates are slightly lowerthan those we have seen in other formal studies, but we believe them to be within the range ofreasonableness. If this number is correct, then the 16 kWh battery pack in the Chevy Volt costsapproximately $10,000, and the Leaf’s 24 kWh pack costs $14,400, while the Tesla Roadster’s53 kWh pack costs more than $30,000. We do not have actual cost data from the companies, butusing the numbers published by one of the industry’s own coalitions seems like a practicalstarting point.The batteries used in today’s electric vehicles use lithium and are similar to the batteriesthat power a laptop computer. The battery costs include 1. obtaining the lithium; 2. building thebattery pack to meet rigorous safety and reliability standards, and 3. constructing the plant wherethe batteries are manufactured. Advocates often forget to include this third element in theirestimates—a category that can comprise about 30% of the total cost of the battery.Some critics worry about the future availability of lithium. We did not find evidence tosupport this concern. A typical lithium-ion battery is between three and five percent lithium, 19which means that each electric vehicle will need between six and ten kg of lithium per car. Thecurrent world reserve of lithium is sufficient to power 1.7 billion vehicles, or about 500 millionmore vehicles than the total projected to be on the road in 2030. Furthermore, usually 50% or15 ICEs have poor efficiency levels relative to electric cars.16 We assume that only 65% of the nominal battery capacity is discharged, similar to the Volt.17 Transitions to Alternative Transportation Technologies: Plug-in Hybrid Electric Vehicles (Washington, DC: TheNational Academies Press, 2010).18 Electrification Coalition, “Electrification Roadmap,” p. 79. November 2009. Accessed online athttp://www.electrificationcoalition.org/sites/default/files/SAF_1213_EC-Roadmap_v12_Online.pdf.19 Fisher, Karen et. al. “Better Waste Management Life Cycle Assessment.” Environmental Resources Management.October 18, 2006. Accessed online at http://www.epbaeurope.net/090607_2006_Oct.pdf.10

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08more of the lithium in a battery can be recycled. Finally, research is being conducted to separatelithium from seawater. Even under a scenario where other uses of lithium increase dramatically,the supply of lithium should be sufficient to meet the needs of an electric vehicle fleet.Can lithium-ion battery costs be significantly reduced below the estimated $600 per kWhfigure? The Electrification Coalition has set a goal of $150 per kWh. While batterymanufacturers keep actual costs a closely guarded secret, at least one has hinted that their costsare already below $300 per kWh.Deutsche Bank has projected that the cost of lithium-ion batteries will decline 7.5% ayear as production increases and will reach $250 per kWh by 2020. 20 Research on alternativebattery types has increased dramatically in the last few years, and there are several promisingtechnologies, including thin-film methods for producing lithium-ion batteries that coulddramatically reduce the weight of the battery, as well as lithium-air batteries, which might beable to produce five times the energy per kg of battery mass as current lithium-ion batteries.However, both technologies are at least six years away from penetrating the electric car market.One of the ongoing difficulties that battery manufacturers must face is enormous pressureto meet safety, reliability, and lifetime performance constraints. A lithium battery is a complexseries-parallel electrical machine made of many small voltage batteries. It must be carefullymade and managed. A single bad or low resistance cell can cause thermal/electric runaway,damaging or destroying the battery. 21Batteries rely on chemical reactions to absorb and discharge electricity; therefore, shortcircuits and leakage are a concern for the large-scale units used in electric vehicles. Batteries canbe damaged by overcharging, exposure to extreme heat or cold, or by impacts and collisions.Manufacturers have to reassure buyers that the batteries in their vehicles will operate under awide range of weather and driving conditions and that passengers will be safe in the event of anaccident. These constraints affect the construction and location of the battery packs, and thustheir cost.In addition, because battery packs are so expensive, manufacturers seek to reassuremotorists that they will have a useful and lengthy lifespan. The industry standard seems to be100,000 miles, which is about ten years. Since battery performance degrades over time as the20 “Deutsche Bank revises li-ion battery cost forecasts downward to $250/kWh by 2020,” Green Auto Blog.Accessed online at http://green.autoblog.com/2011/01/06/deutsche-bank-li-ion-battery-cost-forecast-per-kwh/.21 Comment received from Robert A. Frosch. March 10, 2011.11

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08battery is discharged and recharged, this constraint has forced manufacturers to make only aportion of the battery available for charging/discharging in order to minimize the stress thatcomes from deep discharging and recharging and to keep some the battery’s capacity as sparereserve. For example, the Chevy Volt only charges its battery to 90% of its nominal capacity anddoes not discharge the last 25% of its nominal capacity. 22 While this lengthens the useful life ofthe battery pack, it also greatly increases the cost per useful kWh, and thus the price of thebattery. In the case of the Volt, it takes 1.6 kWh of nominal battery capacity to produce 1 kWh ofuseable energy capacity. The battery industry believes that it can dramatically improve this ratioand will eventually be able to increase useable capacity to more than 90% of nominal capacitywhile still meeting safety and reliability standards.Fuel CostsThe consumer will only purchase an electric vehicle if he or she perceives that thepurchase will provide greater benefits than purchasing a conventional vehicle. One of thestrongest private benefits may be the relative lifetime cost of operating an electric vehicle ascompared to a conventional passenger car. (We note that this is different from the societallifecycle cost of the vehicle, but this paper examines the cost from the consumer’s perspectivebecause for most consumers, this will be their primary motivation in deciding which vehicle topurchase.) Since battery costs, even under the most optimistic scenarios, will ensure that theupfront capital costs are higher for EVs than conventional vehicles, the only way EVs will beless expensive over their lifetimes is if their operating costs are lower than those for ICEs. Fuelcosts dominate the cost of operating a conventional ICE vehicle, and thus gasoline prices are acritical factor in any comparative analysis. If one assumes $6.55 per gallon gasoline, the netpresent cost of purchasing a BEV, even under a $600 per kWh battery scenario, is equal to thatof a conventional vehicle, at a 15% consumer discount rate. (Our costing model is discussed indetail below and presented in full in Appendix A.)One might argue that gasoline prices might not increase to $7 or even $5 per gallon. Atlower gas prices, electric vehicles are less attractive. We realize that future oil prices are fraughtwith uncertainty, but in a world where the global vehicle fleet is 60% larger than today’s, weexpect that demand will place significant upward pressure on oil prices, and thus a $5 per gallon22 “Electrical Energy Consumption in the Chevy Volt.” GM Volt company webpage. December 3, 2010. Accessedonline at http://gm-volt.com/2010/12/03/electrical-energy-consumption-in-the-chevy-volt/.12

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08scenario seems more likely than a $3 scenario. The EIA’s Annual Energy Outlook for 2011projects a 2035 price of $3.89 per gallon and a high estimate of $5.85 (in 2010 dollars). 23A strong possibility remains that between now and 2030 governments will place a valueon carbon emissions, either through taxes or policies that will have an equivalent effect. This willpush the gasoline price even higher. The bottom line is that the future marketplace for passengervehicles will probably be characterized by significantly higher oil prices.One can reasonably argue that electricity prices may also be higher. Nevertheless, even ifthe price of electricity increases from an average of $0.12 per kWh to $0.24 per kWh, its impacton relative vehicle operating costs would be significantly less than a comparable rise in oilprices. For example, increasing the electricity cost in our model of current costs by 100% (from$0.12 to $0.24 per kWh) increases the net present cost of an EV relative to a conventionalgasoline powered vehicle by $1,606, but raising gas prices by 100% (from $3.75 to $7.50 pergallon) increases the net present cost of a conventional vehicle by $6,453. BEV owners maytherefore be more insulated from volatile energy prices than owners of conventional vehicles.Discount FactorElectric vehicles will cost more to purchase. However, since they are primarily fueled byelectricity, not gasoline, they will have lower operating costs over their lifetimes. To compareoperating savings against higher up front capital costs, analysts need to discount the annualoperating savings. Hence, the choice of discount rate becomes important in comparing the totallifetime costs of a conventional vehicle to those of an EV.While one might argue that it is in a consumer’s interest to pay more in the form ofupfront costs in order to capture the longer-term benefits of reducing operating costs, consumersdo not necessarily value the savings in operating costs over the life of a vehicle as highly astheory might lead one to expect. In fact, studies suggest that consumers are reluctant to accept adifferential in upfront costs for efficiency gains greater than the difference in fuel costs over thefirst three years. In other words, they want a payback period that is no longer than three years.Given the volatility in fuel markets, this may be quite rational behavior, but it means that theimplicit discount rate used by consumers may be closer to 30%-40% than the 5%-10% one seesin many studies.23 “2011 Annual Energy Outlook.” U.S. Department of Energy. April 26, 2011. (Washington, D.C., Report#DOE/EIA 0383 ER 2011).13

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08David Greene surveyed the economics literature and found that estimates of consumerdiscount rates varied significantly. He found that many estimates were under 10%, but an equallylarge number were over 20%. 24 Most fell between 4% and 40%, which is a wide range, but it isnot implausible, if one examines discount rates for energy savings from building or appliances. 25The choice of discount rate will have a substantial effect on our comparison of the net presentcosts of the differently fueled vehicles.ResultsIn order to test our assumptions, we constructed a simple model that calculates the netpresent cost differential between HEVs, PHEVs, BEVs and ICEs. The model and all of theassumptions that go into it are presented in Appendix A.Our model suffers from a number of limitations. It does not account for financingarrangements such as leases or loans or for battery degradation over time. It assumes a uniformnumber of miles driven per year and does not account for consumer preferences such asperformance, size, and range. Perhaps most importantly, the model does not capture pricingdecisions made by the automakers. Nevertheless, we believe it is a helpful tool in illustrating themain drivers of the cost differentials between various vehicle technology types and fordemonstrating the sensitivity of cost outcomes to key assumptions and variables.In our initial case, outlined in Appendix A, we simply wanted to determine thecomparative costs in 2011. Unlike all the other cases, this case uses existing numbers andassumptions. We assume a gasoline price of $3.75 per gallon (which is approximately equal topump prices as of mid-June 2011) and battery costs of $600 per kWh. We assume that allvehicles in our comparison are driven 12,000 miles per year and that the average price ofelectricity is $0.12 per kWh. We use a discount rate of 15% and assume there are no governmentsubsidies. Finally, we assume that consumers pay $1,500 to install a Level II 220-240 volt outletto charge their EV and that the plug-in hybrid is driven 85% of the time in all-electric mode.Some of these assumptions may be optimistic, but all are within the range of reasonableness.24 Greene, David. “Why the Market For New Passenger Cars Generally Undervalues Fuel Economy.” (JointTransport Center, OECD) ITE. January 2010. Discussion Paper 2010-6.25 Train, K.E., “Discount Rates in Consumers’ Energy-Related Decisions: A Review of the Literature,” Energy, Vol.10, No. 12 (1985):1243-1253.14

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08We compare the lifetime costs to the consumer of four different vehicles—a conventionalICE vehicle, a conventional hybrid (HEV) using technology similar to that used by Toyota’sPrius, a plug-in hybrid with an all-electric range of 40 miles (PHEV-40) and an all-electricvehicle (BEV) with a rated range of 100 miles. The comparison consists of looking at all thecosts—both upfront capital costs and operation and maintenance costs—over a ten-yeartimeframe. To compare the lifetime costs of the four vehicles, we discount the savings in thelater years to derive a net present cost for the upfront capital costs and the discounted operationand maintenance costs.Scenario 1In the initial case, we find that the net present cost of a conventional car over its lifetimeis $32,861 (assuming a purchase price of $21,390); the net present cost of an HEV is $33,059(assuming a purchase price of $22,930); the net present cost of a PHEV is $38,239 (assuming apurchase price of $30,235); and the net present cost of a BEV is $37,680 (assuming a purchaseprice of $33,565).Thus, in 2011, a conventional car is $4,819 less costly over its lifetime than a batterypoweredelectric car, and is $5,377 less than a PHEV-40 (see Table 1).Interestingly, these cost differentials are within a few thousand dollars of the $7,500subsidy now offered by the federal government.TABLE 1: Today’s CostsConventional HEV PHEV BEVTotal Net Present Cost $32,861 $33,059 $38,239 $37,680Cost Differential with Conventional Car --- $197 $5,377 $4,819Scenario 2We then constructed what we believe is a reasonable future base case scenario. Weassume that technology breakthroughs reduce battery costs (to $300 per kWh of nominal batterycapacity), that gasoline prices increase to $4.50 per gallon, and that electricity prices will be 30%higher ($0.15 per kWh). Under these assumptions, BEVs are less costly than both conventionalICEs and HEVs. PHEVs remain higher priced than the other three options (see Table 2).15

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08TABLE 2: Future Costs – Base CaseConventional HEV PHEV BEVTotal Net Present Cost $34,152 $32,680 $34,601 $30,674Cost Differential with Conventional Car --- ($1,472) $449 ($3,478)We used this “future scenario” as the base case for the construction of five additionalscenarios, in each of which we varied one of the assumptions.Scenario 3The assumptions are the same as in Table 2, except that gasoline costs increase to $6 pergallon. Electric vehicles, both BEVs and PHEVs, are now less expensive than conventionallyfueled vehicles, with BEVs enjoying an advantage of over $6,000.TABLE 3: Future Costs – High Gasoline PricesConventional HEV PHEV BEVTotal Net Present Cost $36,733 $34,323 $34,847 $30,674Cost Differential with Conventional Car --- ($2,411) ($1,886) ($6,059)Scenario 4The assumptions are the same as in Table 2, except that the consumer’s discount rate is30%. BEVs are now only slightly less costly that conventional vehicles, illustrating thesensitivity of the cost calculations to the estimates of discount rates.TABLE 4: Future Costs – High Discount RateConventional HEV PHEV BEVTotal Net Present Cost $29,251 $28,475 $31,349 $28,940Cost Differential with Conventional Car --- ($776) $2,097 ($312)Scenario 5The assumptions are the same as in Table 2, except that battery prices (for both BEVsand PHEVs) are $150 per kWh as opposed to $300 per kWh. Electric vehicles’ cost advantage islarger than in any other scenario, and BEVs become almost $6,000 less expensive than plug-inhybrids.16

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08TABLE 5: Future Costs – Low Battery CostsConventional HEV PHEV BEVTotal Net Present Cost $34,152 $32,080 $32,549 $26,971Cost Differential with Conventional Car --- ($2,072) ($1,603) ($7,181)Scenario 6The assumptions are the same as in Table 2, except that electricity prices are $0.24 perkWh instead of $0.15 per kWh. Despite the higher electric price, BEVs are still less costly thanother transport options.TABLE 6: Future Costs – High Electricity PricesConventional HEV PHEV BEVTotal Net Present Cost $34,152 $32,680 $35,624 $31,897Cost Differential with Conventional Car --- ($1,472) $1,472 ($2,273)Scenario 7The assumptions are the same as in Table 2, except that the fuel efficiency ofconventional cars reaches 50 miles per gallon, while the fuel efficiency of HEVs and PHEVswhen burning fuel reaches 75 miles per gallon. Not surprisingly, the price advantages of HEVsand BEVs relative to conventional vehicles decrease, but even in this scenario, BEVs remain thecheapest transport option.TABLE 7: Future Costs – Higher Fuel EfficiencyConventional HEV PHEV BEVTotal Net Present Cost $31,829 $31,366 $34,403 $30,674Cost Differential with Conventional Car --- ($463) $2,574 ($1,155)In addition to the key variables of gasoline prices, discount rate, and battery pack cost,the costs of BEVs are highly sensitive to desired BEV range (i.e. battery pack size), as greaterdesired range necessitates a larger battery pack. For example, under the scenario laid out in Table2 above, increasing the desired BEV range from 100 miles to 150 miles increases the BEV’s netpresent cost by $3,704, making it slightly more expensive than a conventionally fueled vehicle.17

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08Increasing the BEV’s range from 100 miles to 250 miles (approximately the range of a newTesla Roadster) increases the BEV’s net present cost by $11,111, making the BEV $7,633 moreexpensive than a conventional ICE.As a further test of the sensitivity of our model to our key variables, we ran a MonteCarlo simulation, which gave us probability distributions of potential cost differentials, given thedistributions for key variables that we input into the simulation. The mean values of the keyinput variables are the same as the scenario presented in Table 2; the full sensitivity analysisinput distributions and results are presented in Appendix B.The Monte Carlo simulation demonstrates that if one finds the input distributions to bereasonable for the key input variables, there is a strong probability that in the future EVs will, ona net present cost basis, be either cost competitive with or less expensive than HEVs andconventional vehicles. There is also a reasonable probability that PHEVs will be relatively moreexpensive than either BEVs or HEVs (though again, this model does not take into considerationthe economic cost of consumers’ potential range anxiety, which we will discuss in the nextsection).If, however, one believes that gasoline prices will hover near the $3.75 level, that batterytechnology will not drive costs below $300 per kWh, and that consumer discount functions willhover in around 30% range, the lifetime cost of conventional gasoline vehicles and hybrids willremain lower than that of plug-in hybrids, and in most cases, BEVs.3. Comparing AttributesThere are two schools of thought about how consumers’ purchasing behavior will affectthe electric car market. The first asserts that consumers look to purchase new vehicles whoseattributes are superior to those of their existing vehicles. Few people go to the car dealer lookingto purchase a vehicle that has worse performance, fewer accessories, and less room than the carthat they are replacing. For electric vehicles to be competitive, they must be able to perform atthe same level, possess the same attributes, and be approximately the same size as theconventional cars that they are replacing. For example, the Nissan Leaf is rated up to 90 kW ofpower—equivalent to a 120 horsepower in a conventional car—which is in line with a largenumber of compact and intermediate vehicles, such as a VW Jetta, a Toyota Corolla, or a Ford18

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08Focus. Thus, if performance were the only point of comparison, the Nissan Leaf is competitivewith current ICEs.However, performance is not the only measure that consumers use to compare vehicles.The two attributes that present the greatest challenge to PHEVs and BEVs are range andreliability. The average conventional vehicle has a range of between 350 and 450 miles per tankof gasoline. Relatively long-range travel in a BEV requires very large batteries. For example, theTesla Roadster sports car achieves a maximum rated range of 244 miles through a massive 450kg (992 pounds) battery pack consisting of 6,831 lithium cells at an estimated cost of $30,000. 26(For a sense of scale, the Toyota Prius HEV has a battery pack of 168 cells that operates ataround 36 horsepower.) PHEVs can continue being driven after the electricity in the battery packis exhausted, which will occur after 20 to 40 miles, depending on the driving conditions and thesize of the PHEV’s battery pack. Since they are more complicated to build and run at leastpartially on gasoline, PHEVs will have a higher lifetime cost than comparable BEVs, and thisdifference may be a good proxy for the range anxiety exhibited by consumers. That is, ifconsumers pay $4,000 more for PHEVs than comparable BEVs, that figure may represent thevalue of eliminating the range anxiety connected with the ownership of a BEV.The second school of thought argues that range anxiety is overhyped. The proponents ofthis thesis point out that there are 80 million motorists living in cities or in nearby suburbs.Surveys by the National Highway Administration show that these motorists drive less than 20miles per day on average. 27 Thus, on an average day, they would not come close to exhaustingthe power stored in a BEV with a range of 100 miles. In fact, they would only have to rechargetheir batteries every two to four days. Furthermore, if charging stations existed at theirworkplaces or in the parking lots where they shopped, there would be only a few days per yearwhere the range of an electric car would be insufficient. Under these conditions, concern overrange might shrink to such a level that consumers would purchase electric cars with smallerbatteries at lower prices, improving the comparable cost estimates. In fact, McKinsey released astudy asserting that electric cars will make major inroads into the passenger vehicle fleet in large26 Berdichevsky, Gene et al. “The Tesla Roadster Battery System.” Tesla Motors web archive. August 16, 2006.Accessed online at http://teslamotors.com/display_data/TeslaRoadsterBatterySystem.pdf.27 Hu and Reusher. “Summary of Travel Trends: 2001 National Household Travel Survey.” Table 5. Page 15.19

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08cities, such as New York, Paris, and Shanghai by 2015, primarily because range will not be anissue for many motorists with daily commutes of less than 30 miles. 28If consumers own electric cars, how would they meet their peak demand requirements,such as the 150+-mile trip in the summer to visit family? One solution could be to use the BEVas a second vehicle and purchase a larger conventional vehicle (or PHEV) for longer trips, butfor most motorists, this would be an expensive option. Alternatively, the BEV owner couldsimply rent a larger vehicle with greater range for occasional trips where range and size wereimportant. Assuming rental costs of $75 per day and $50 for time lost picking up and droppingoff the vehicle, and assuming that such a car was needed 15 days per year (for five trips), thenthe annual cost would be approximately $1,375. The problem is that if the number of peakdemand trips posited above exceeds one per month (under our future baseline scenario), the netpresent cost advantage may shift back to favor conventional gasoline-powered vehicles overBEVs. Hence, the range limitations of BEVs may deter a family with even a moderate number ofpeak demand days.The central problem with this second line of argument is that it requires consumers tochange their buying habits dramatically. Consumers are more likely to purchase a car that meetstheir needs 100% of the time as opposed to 90% of the time. Hence, purchasing vehicles withlimited range will require a significant change from the status quo. One might argue that a statusquo that induces consumers to purchase relatively inefficient, two-ton vehicles to drive less thantwenty miles per day in order to have the vehicle available for ten, five, or even fewer trips peryear of 150+ miles may not be an economically optimal scenario. Perhaps this is true, but itwould be hard to deny that this consumer behavior exists. For EVs to gain significant fleetpenetration, manufacturers of EVs will require strategies for overcoming this buying pattern.The reality that the actual range of a BEV may be less than the maximum rated range percharge exacerbates this problem. For example, actual mileage of a Nissan Leaf may besignificantly less than 100 miles per charge. If the driver uses the air conditioner, entertainmentequipment, or even headlights, electricity will be drawn from the battery, leaving less availablefor driving the vehicle. Even if the actual mileage available were closer to 60 miles per charge,most commuters would not be inconvenienced, because average daily mileage is below 20 miles28 Hensley, Russell et al. “The Fast Lane to Adoption of Electric Cars.” McKinsey Quarterly. February 2011.20

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08per day. Nevertheless, most automobile buyers are risk-averse, and 60 miles per charge triggersmore range anxiety than 100 miles.Some might point out that if electric car owners only average 20 miles per day, theywould be likely to drive 6,000 miles or less per year. Therefore, the numbers in our earliercalculations might misstate the net present cost advantage of EVs. It is true that an electric carthat is driven 6,000 miles per year will use less electricity than one that is driven 12,000 miles.However, electricity is not very expensive, so the additional net present savings of cutting one’sdriving in half in a BEV would be about $1,000 under our future baseline scenario. By contrast,if the owner of a conventionally fueled car drives it 6,000 miles per year instead of 12,000, thenet present cost of his vehicle would decrease by just over $4,000. Thus, conventional carswould benefit more than electric vehicles if they are driven less, since the marginal cost ofdriving a conventional car (the price of gasoline) is far greater than the marginal cost of driving aBEV (the price of an equivalent amount of electricity). Therefore, the more a car is driven, thegreater the lifetime cost advantage of BEVs over ICEs.While range anxiety may be the greatest challenge, it is not the only attribute thatconcerns potential BEV purchasers. BEVs and PHEVs are unfamiliar technologies to the averageconsumer, who has been driving some version of gasoline-powered car his or her entire life.Since a new vehicle is usually the most expensive purchase (other than a new home) thatconsumers make, they are usually risk-averse when purchasing vehicles. Consequently, they willlikely purchase vehicles that closely resemble the ones they currently own. In addition, brandloyalty runs deep—even when cars are actually quite similar. In this case, we are talking abouttechnology loyalty, which may run even deeper than brand loyalty.Admittedly, very little data exists on the reliability of electric vehicles, and for thisreason, we emphasize consumer perceptions as opposed to factual realities. The industry is awareof this problem and has invested billions of dollars to ensure that EVs operate as reliably asconventional vehicles. However, it will take time for the public to adjust its perceptions. Toaccelerate this process, the government offers tax credits to early adopters who are willing totake on the perceived technology risks. These credits expire either over time (as in Europe) orafter a certain number of cars are sold (as in the United States).What other attributes might attract consumers to EVs? Some people cite the opportunityto sell backup power to the grid with vehicle-to-grid (V2G) technologies, which under some21

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08scenarios may reduce the cost of power to almost zero while dramatically improving theefficiency of the grid. If smart grids emerge, and EVs are all hooked up to those grids, and ifconsumers are assured that the effective operation of their vehicles will not be compromised, theability to arbitrage electricity prices in order to offset the costs of EV ownership might be valued.However, at the moment, such an application remains in the realm of a speculative benefit asopposed to an actual one.Some argue that recharging a car at home will prove to be more convenient than havingto drive to the local gasoline station to fill up. Again, this may be the case, but is it worth payingan additional $50, $250, $1,000, or $4,500+? There is no actual data with which to answer thisquestion, but we suspect that most consumers will not be willing to pay much to avoid weeklytrips to the gas station. Further, the possibility exists that PHEV owners will simply “forget” orstop charging their vehicle regularly and instead run it on gasoline most of the time.Other benefits asserted by EV advocates include reduced pollution, greater vehicleefficiency, improved national energy security, and reduced carbon emissions. All of thesebenefits are real and may prove to be large, but they are all public benefits (or positiveexternalities), which are not captured by the private individual. Admittedly, there will beindividuals who place a large value of being more environmentally responsible, and they arelikely to be less dissuaded by high initial prices or limited range than the majority ofconsumers. 29 However, as stated earlier, these consumers account for a small segment of thepopulation.The bottom line is that electric vehicles currently do not provide private attributes andbenefits that exceed, or even equal those of most conventional gasoline-powered cars. Rangedeficiency is the single largest technical barrier separating electric vehicles from their gasolinecounterparts, compounded by long recharge times when compared to filling up at a gas station.As we have discussed, the cost of range anxiety depends on the individual. The most obviousmeasure would be the net present cost difference between a PHEV and a comparable BEV,which in our scenarios ranges from about $2,500 to $5,500. As mentioned earlier, there may beother measures. As more EVs show up in company showrooms, we will begin developing adatabase from which analysts can answer this question. Moreover, research on producing lighter29 Gallagher, Kelly Sims and Erich Muehlegger. "Giving Green to Get Green: Incentives and Consumer Adoption ofHybrid Vehicle Technology." Working Paper, John F. Kennedy School of Government, Harvard University,February 2008.22

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08and more efficient batteries continues, and a new technology may emerge that will dramaticallyincrease the range of electric vehicles at a fraction of today’s battery cost. But until this occurs,range anxiety will remain a major concern of most consumers.4. Adequacy of InfrastructureElectric cars are fueled wholly or partly by electricity, which presumes access to areliable source of power. Equipment for connecting an EV to a source of electricity is required,at home and/or outside the home. Proponents are concerned that adequate electric distributionand transmission infrastructure might not exist when and where it is needed. This concern goesto the heart of the debate in Congress over the question of whether to subsidize installation ofpublic charging stations in five to fifteen EV deployment communities. 30 Our initial conclusionis that a market failure justifying a strong federal presence is not evident. While there areregional differences in the adequacy of the existing electric distribution, transmission, andgenerating systems, there is no evidence to conclude that investments will not be forthcomingfrom private companies to meet those needs, if and when they manifest themselves.Historically, early purchasers of gasoline-powered cars faced a similar dilemma. Therewere no gasoline stations during the first decades of the automobile era. Owners bought gasolinefrom grocery stores and pharmacies. Even when demand for gasoline was in its infancy, somestoreowners in the community saw an opportunity to make some money and added gasoline totheir supply inventory. As the demand grew, so did the number of individuals or companies thatsold gasoline, until dedicated retail establishments emerged as the forerunners of the moderngasoline station.To an extent, providing electricity for vehicles will be an easier task, since everyhousehold has access to power, which was not the case with gasoline. Nevertheless, it is worthexamining the possible future electricity capacity needs and assessing the ability and willingnessof the private sector to meet them.We anticipate that most EV owners will want to charge their vehicles at home, soappropriate charging infrastructure is needed at each household. A standard wall outlet willprovide power at 110 volts and 20 amps. In the simplest case, owners can run an electric cord30 The Electric Vehicle Deployment Act of 2010, U.S. Congress (S.3442, H.R. 4442). Accessed online athttp://www.govtrack.us/congress/bill.xpd?bill=s111-3442.23

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08from the house to the EV. The electric load will be equivalent to adding a new clothes dryer tothe house, which means that an electrician will likely be needed to install a dedicated outlet,though many houses would be able to manage the extra electricity pull without any additionalwiring. This type of connection is labeled a Level I system and is relatively inexpensive,assuming that the vehicle comes with the equipment to receive the electric charge. The downsideis that the charging process is excruciatingly slow. For example, charging a Tesla Roadster from“empty” on a Level I system will take over thirty hours, and fully charging a Nissan Leaf from“empty” will take about twenty hours. Charging the Chevy Volt (a PHEV) from “empty” willtake about seven hours, so if the owner plugged in her Volt at 10:00 p.m., it would be ready byearly morning.In practice, most EV owners will find Level I charging unacceptable as a sole energysource and will install a Level II charging system, which operates at 220 volts and between thirtyand forty amps. With this system, a Nissan Leaf could be charged in seven hours. 31 Such asystem would equal the electric pull of about two clothes dryers, and thus installing such asystem would be approximately the same as adding one-half a house to a normal residential area.A Level II system can be installed by any licensed electrician and includes a special connector.The cost estimates vary and are likely to decrease over time, but are now approximately $1,500-$2,200 per household. 32A popular topic among EV enthusiasts is “quick charging,” which is charging an electriccar in approximately the same time it takes to fill up a gasoline car at your local gasoline station.These Level III systems draw about 210 kilowatts for ten minutes, or about the same draw as 140houses, if one assumes that each home draws about 1.5 kW of power. The current could be up to500 volts at 200 amperes, which would require very expensive conductors and sophisticatedsafety systems. This system has been demonstrated and is technically feasible, but for safetyreasons, would only be available at dedicated service stations. Finally, Level III charging wouldlikely subject the battery pack to significantly greater wear and tear than Level II charging andmay cause the EV battery to degrade more quickly.31 “Nissan Leaf: Charging FAQ.” Nissan USA company website. Accessed online at http://www.nissanusa.com/leafelectric-car/faq/list/charging#/leaf-electric-car/faq/list/charging.32 Bristow, Nick. “2011 Leaf US Pricing Officially Announced.” Autoblog Green website. Accessed online athttp://green.autoblog.com/2010/03/30/2011-nissan-leaf-us-pricing-officially-announced-as-low-as-25/.24

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08Level III charging would also put an enormous strain on the existing electric distributionsystems and would require an industrial-sized substation to handle the power surges at eachindividual location. The cost of this system would be substantial, though we were not able toidentify estimates that we could confidently embrace.If EVs gain popularity, there will be pressure to install these systems at commerciallocations. Consumers would either pay a monthly fee to access the public chargers or pay peruse, similar to how a transponder works on a toll road. The cost for commercial Level II chargerswould be slightly less than household installations, since they could be installed in arrays of fourto six connectors at a time. Coulomb Technologies advertises pole-mounted stand-alone Level IIcharging systems for $2,000 to $6,000, 33 but we suspect that the actual prices will usually be lessand fall over time as competition among manufacturers of Level II chargers increases withdemand. Given the low upfront costs and the existing menu of payment options, privateproviders, in partnership with utilities or as stand-alone enterprises, will be prepared to makethese investments. Furthermore, there are no major barriers to entry. Thus, if the demandmaterializes, a competitive industry should also develop to meet it.If one is skeptical and believes that governments must intervene and subsidize the upfrontcosts of non-residential charging stations, a demonstrated market failure must justifygovernment involvement. Will the local utilities fail to make the investments, and will theyprevent others from investing? The former scenario is quite possible, given that utilities are riskaverseinvestors, but there is no reason that they would not welcome new paying customers,especially if they themselves do not have to take any of the front-end risk. Given that chargingstations are relatively inexpensive and can be erected in a matter of hours, the system can expandto meet demand quite easily.The principal argument for government intervention is timing. Though the private sectorwill invest in charging stations, it probably will not do so until sufficient demand generates arevenue stream to earn a reasonable rate of return on its investment. Thus, governments are beingasked to invest in advance of demand and take at least some of the losses in the early yearsbefore the EV population is sufficient to make such a public charging system profitable. Thisscenario is not a market failure; it is the granting of a subsidy to induce consumers to buy electric33 “Coloumb Charging Stations.” Coulomb Technologies. July 15, 2010. Accessed online athttp://www.coulombtech.com/products-charging-stations.php.25

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08cars and has little to do with infrastructure needs. Furthermore, it could potentially distort thesystem and erode the incentives for private entrepreneurs to get into the recharging market. It isakin to offering subsidized gasoline for anyone buying a particular make of car and having thegovernment subsidize the gasoline.Finally, proponents argue that urban residents are more likely to buy electric cars thanthose living in rural or suburban neighborhoods, but many urban dwellers do not have privategarages and therefore park on the street. Lack of on-street charging will be a major deterrent toowning an electric car in dense city environments. While installing on-street charging will makea difference, it will be more cost-effective for cities to enter into partnerships with privatecompanies to install and maintain the equipment in return for a fee or lease payment. There willbe cases, however, of consumers who may delay the purchase of EVs due to lack of on-streetcharging equipment. If the number is large or even moderate, fewer electric cars will be sold, butas some stage, private entrepreneurs will see an opportunity to make money and push the citygovernment to allow them to install changing stations. Furthermore, it is not obvious that onstreetcharging will be embraced. Legal concerns, liability issues, and the threat of vandalismmay make on-street charging unappealing. Placing charging stations in garages, parking lots, andeven special stations may be a more acceptable alternative.While the argument favoring government subsidies for the installation of public chargingstations is not supported by evidence of any market failure, strong government regulation to setstandards for such charging equipment is needed. Europe is beginning to establish standards forprivately sold charging equipment to ensure that they are compatible with new EVs and meetstrict safety regulations.Projections of possible impacts of EVs on the grid vary greatly according to location,time of day, and the technology used for charging. Kintner-Meyer et al. and Denholm and Shortexamine the potential impact of PHEV adoption on the U.S. grid (the impact of which would be,by definition, smaller than an equivalent number of BEVs) and conclude that if the PHEVs werecharged at lower voltages at optimal times of day (i.e. night), then between 50% and 73% of theU.S. light duty vehicles could be converted to PHEVs and be supported by the existing electric26

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08infrastructure. 34 These numbers assume that the grid can remain relatively stable whileconstantly running at or near 100% capacity, which may not be realistic, but their analysessuggest that a substantial number of EVs could be absorbed by the current grid without addinggenerating capacity.Local percentages will vary by region. Current capacity in the eastern U.S. should be ableto support a higher percentage of EVs in the vehicle pool than current capacity in western states.Within these regions, there will be utilities that are capacity short and others that will be capacitylong, and thus national averages do not have much significance when examining the situation ina particular state or county. As technologies change and the level of fleet penetration increases,more investment will be needed. This is especially true if consumers gravitate towards BEVs ascompared with PHEVs. Furthermore, these projections assume that EV charging equipment willbe able to communicate to the grid in order to synchronize the supply and demand in such a waythat the system is optimized. In other words, these studies assume that utilities will have alreadyinvested in smart grid technology, which may or may not be the case.In the same way that generation capacity to supply electric vehicles varies by region, sotoo does the need to enhance the distribution systems. In some localities, there will be a need forsignificant new investment. For example, if every home in a ten-house cul-de-sac installed aLevel II charging system, the pull on the transformers would be equivalent to addingapproximately five new homes. Hence, the utility would probably have to upgrade itsdistribution system. On the other hand, there will be areas where the addition of some electriccars will not make much of a difference and will not require much investment.In a very optimistic scenario, let us assume that 30% of the vehicles in SouthernCalifornia shift to electric cars by 2030. This would be over two million vehicles. Let us furtherassume that all of their owners install a Level II system at their homes and that an additional300,000 charging stations are installed in commercial locations. If the ratio of households to carsis 1.25 to 1, then the draw on the distribution system would be equivalent to about four millionnew clothes dryers—a substantial increase in demand. However, the utility would have twentyyears to make the necessary investments, assuming linear growth in electric vehicles and no34 Kintner-Meyer, M. et al. “Impacts Assessment of Plug-in Hybrid Vehicles on Electric Utilities and Regional U.S.Power Grids.” November 2007. Accessed online at https://www.ferc.gov/about/com-mem/wellinghoff/5-24-07-technical-analy-wellinghoff.pdf; and P. Denholm and W. Short, “An Evaluation of Utility System Impacts andBenefits of Optimally Dispatched Plug-In Hybrid Electric Vehicles.” October 2006. Accessed online athttp://www.nrel.gov/docs/fy07osti/40293.pdf.27

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08major change in battery technology. Thus, the utility would only have to upgrade a smallpercentage of its system every year. The actual percentage and cost would be specific for eachutility.The larger question is who will pay for these upgrades? In many parts of the country, theunbundling of the electric utility industry separated transmission and distribution fromgeneration and focused attention on issues such as transmission tariffs and access—issues thathad been bundled with the costs of generation in the old vertical integrated model. Over the lastten years, some states have found their transmission systems congested and in need of additionalinvestment. Since these systems are part of a larger grid, the logical assumption was that all ofthe consumers in the area serviced by the grid would pay for the needed upgrades. This policydid not sit well with states or regions that possessed adequate transmission capacity. They did notwant their consumers to pay for investments in other states—investments that would only benefit“other” users. These concerns gave rise to policies embraced by state and federal regulators thatnew transmission investments should be paid for by the beneficiaries of the investments.Implementing such a policy, however, is challenging. Who are the beneficiaries? Does theiridentity change over time? How much do they benefit?These questions are at the forefront of the current regulation policy debate, and publicutility commissions are working to address them. Initially, this debate focused on transmissionupgrades, but there is no reason that it cannot apply to distribution systems as well. This issue isless of a problem for generators, since in more than half the country, generators are independentpower producers, and whoever buys the power pays.How does this issue affect electric cars and the rate of investment in charging equipment?In the initial stages of the industry, it will not, since the number of electric vehicles sold will besmall. However, if President Obama’s goal of one million electric vehicles by 2015 were tomaterialize, EV sales would constitute about 7% of car sales. Such sales would probably not beevenly distributed across the country. For example, the percentage in California and the northeastmight be larger—for example, 15% of new car sales rather than 7%.At this stage, local utilities in these areas could be under pressure to invest significantcapital in upgrading their distribution systems in order to accommodate the new load. If much ofthe incremental demand is driven by the installation of charging equipment for electric cars, EVowners will benefit directly from these investments. Who should pay? This issue is complicated28

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08by the fact that utilities might want to upgrade their systems in advance of this demand. Howdoes a utility identify a potential electric vehicle owner? Is it fair to bill someone for aninvestment that he or she might use five years hence?The easiest solution would be to have everyone on the grid pay for the improvements, butit is likely that a portion of the stakeholders will insist on compliance with the “beneficiary pays”principle. This problem is solvable, but will create a policy challenge and may slow investmentin upgrading the distribution and transmission systems.Finally, if the need for additional power emerges rapidly and existing siting andpermitting hurdles for new power plants remain, utilities will be under pressure to keep theirolder plants in use, since they will not be able to permit, finance, and build new facilities fastenough. In many parts of the country, these plants are coal-fired. The irony is that a rapidelectrification campaign, justified on environmental and climate grounds, may extend the life ofmany older and dirtier coal plants, significantly diluting the environmental benefits of electricvehicle adoption.If the argument in favor of government intervention to ensure that charging stations areavailable is not compelling, why is it being made and, in many cases, accepted? There are twopossibilities. In the first case, one might argue that our confidence that private parties willrespond to an emerging demand for public charging stations is misplaced and that they willinstead ignore this market opportunity. For the reasons stated above, we do not find thisargument compelling. In the second case, perhaps the demand for EVs will not emerge unlesspublic charging stations are widely available. People will purchase fewer electric vehicles thanthey otherwise would due to worries about the absence of charging opportunities beyond theirhomes. Since one charge per night will provide about 50-70 miles per day and most people livingin urban areas drive less than twenty miles, this issue may be more of a perception problem thana real one, especially if most people opt to buy PHEVs as opposed to BEVs. But even if it isprimarily a problem of perception, it will still almost certainly retard some investments inelectric vehicles.Thus, government subsidization of public charging is aimed at spurring consumers at themargin to purchase new electric cars. A logical question would be, if the government wants toprovide an additional subsidy to spur EV sales, is subsidizing the installation of public chargingstations the best way to do so? Perhaps increasing tax credits to consumers from $7,500 per29

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08vehicle to $10,000 or extending the life of the credit beyond the first 250,000 vehicles producedwould be more effective and more economical.ConclusionThe recent history of U.S. energy policy is replete with examples of generous support fornew technologies. Starting with nuclear power in the 1960s and 1970s, to synthetic fuels in thelate 1970s and early 1980s, and more recently to biofuels, Americans have enthusiasticallyembraced the promise of new energy technologies, only to become disappointed whenexpectations were not met. It takes longer than one anticipates to develop and commercializenew energy technologies, and public support for policies, as well as technologies, can be shortlivedand fickle. Nuclear power, for example, plays an important role in the country’s energymix, but plays a much smaller role than its supporters predicted forty years ago. Biofuels mayplay a significant role in the future, and synfuels are getting a new look as countries like Chinasearch for alternative uses for their coal reserves. But whatever benefits they provide will almostcertainly emerge more slowly than originally predicted.The challenge is that millions of people and/or organizations have to buy these newtechnologies. When the country invested millions of dollars to put the first man on the moon,there was one buyer—the U.S. government—and price was not an issue. In the case of energy,producers have to sell their technologies and, more importantly, the services provided by thosetechnologies to millions of consumers.If electric vehicles are to penetrate the market sufficiently to have a measurable impact ongasoline consumption (and oil imports) or to be able to reduce carbon dioxide emissionssignificantly, then millions of consumers will have to purchase those vehicles. Seven thousandconsumers bought electric cars in 2009, and this number will easily increase to over 50,000vehicles per year in the next few years. The test, however, is whether electric vehicles cansurpass 2.5 million vehicles sold per year, which would allow the industry to capture 20% of theU.S. new car market by 2025. To put this goal in perspective, sales of conventional hybrids(HEVs) in 2009 in the United States remained below 300,000 vehicles. 35 Reaching sales levelsabove 2.5% of the new car market means convincing consumers that an electric car provides35 “J.D. Power: Annual U.S. Hybrid Sales Beyond 1 million by 2015,” HybridCars.com. Accessed online athttp://www.hybridcars.com/news/jd-power-annual-us-hybrid-sales-beyond-1-million-2015-28126.html.30

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08benefits that in aggregate are equal to (or greater than) those of an equivalent conventionalgasoline-powered car.Our study shows that in a scenario characterized by increases in gasoline prices anddecreases in battery costs approximately in line with what the industry is predicting, batterypoweredelectric cars will cost less than conventional gasoline-powered vehicles over the courseof their lifetimes. This result is absent the existing $7,500 tax credit or any other federal subsidy.If gasoline prices turn out to be even higher, either because of future demand/supply imbalancesor because of additional taxes on gasoline or carbon, electric cars, particularly BEVs, will have asignificant net present cost advantage. We find that if the only issue were cost, governmentsubsidies may not be needed past 2015. If oil prices decrease instead of increase, this will not bethe case, but we believe that oil prices in 2015 will probably be measurably higher than those in2010.The only case where this scenario does not hold is if one assumes that consumers have avery high discount rate in calculating the value of the gasoline costs avoided over the life of theelectric car. Thus, the lifetime cost advantages that EV proponents extol may not be embraced byconsumers who do not value savings beyond those that pay back in three years. Furthermore,some consumers do not retain their cars beyond three to five years, and thus lifetime costbenefits measured over ten years are not very meaningful to them. For these consumers, thetrade-in value of EVs will be a key aspect of their decision-making process, and little data on EVtrade-in values currently exists.If the reader embraces the high discount rate scenario, then to sway large numbers ofconsumers to purchase them, either EVs will have to have a clear upfront (“sticker”) costadvantage over conventional cars, or gasoline prices will have to be closer to $6-$8 per gallonthan $4.Perhaps the biggest challenge facing electric cars is providing attributes—particularlyrange—that are equal to or superior to those of conventional vehicles. Consumers want topurchase new cars that provide comparable or superior attributes to their current (ICE) vehicles.Electric car manufacturers have worked very hard to achieve comparability in every area, saverange. To eliminate this constraint completely, the industry must find new battery technologiesthat are lighter and less expensive and that can withstand harsh driving conditions; or theindustry must make breakthroughs in lithium-ion technologies that most battery experts believe31

WILL ELECTRIC CARS TRANSFORM THE U.S. VEHICLE MARKET? BELFER CENTER 2011-08is improbable. The former may happen, but if it does, the new technologies are unlikely to becommercialized before 2018.Alternatively, many urban-dwelling car buyers may discover that their range anxiety isirrational. While consumers in Nebraska and South Dakota will not rush to their local electric cardealer, those in New York, Washington, D.C., San Francisco, Baltimore, and Chicago may findthat electric cars fit their needs well. This scenario may be even more realistic in Chinese andIndian cities than in the United States. The problem is that it is very difficult to change consumerhabits and preferences. The consumer who drives 20 miles or fewer 340 days per year buys avehicle not for 340 days, but for the 25 days that their family drives 100+ miles. Since these tripsare often in the summer to more rural locations, the existence of charging stations at their workplaces or at their shopping mall parking lots may not resolve the problem.A scenario like the one painted by the recent McKinsey report (in which urban dwellersaggressively purchase electric vehicles) is possible, but in our view, is unlikely, unless eithergasoline prices are in the $5+ per gallon range and battery costs fall considerably, or thegovernment aggressively restricts certain urban areas to electric cars only. A number ofEuropean cities already have travel restrictions in place, such as pedestrian-only downtownareas, or very high congestion or cordon pricing schemes, such as in London and Stockholm. It isnot outside the realm of plausibility to see similar restrictions that favor electric vehicles, butagain, they are much more likely to occur in Europe, China, and/or India than in the UnitedStates.In summary, significant penetration of electric cars into the U.S. marketplace will onlyoccur if the vehicles are competitive with conventional vehicles, not only on a cost basis, but alsoon an attribute basis. We believe that for this to occur, 1. gasoline prices will have to increase toor beyond $5 per gallon; 2. the government will have to accelerate such an increase by placing aprice on those externalities—pollution, imported oil, or greenhouse gases—that it wishes toreduce, and 3. the industry must develop a battery technology that will permit electric cars totravel greater distances at lower costs, probably with aggressive government support in theresearch, development, and deployment of these new technologies.A future in which electric cars play a significant role in the nation’s transportation systemis not a pipe dream, but it will not happen without higher gasoline prices and a much strongerpartnership between private industry, the federal government, and state and local governments.32

Appendix A: Cost Model at Current Energy PricesExpense Conventional HEV PHEV BEV Assumptions:Fuel Price per Gallon: $3.75Glider $15,280 $15,280 $15,280 $15,280 Battery Pack Cost ($/kWh), PHEV: $600Engine $3,710 $2,190 $2,190 $1,200 Discount Rate: 15%Transmission $2,400 $2,290 $2,290 V2G Benefit ($ per kWh usable capacity per year): $0Motor/Inverter $770 $770 $770 Battery Recycle Credit (% of Initial Battery Cost): 0%Battery $2,400 $8,205 $14,815 Avg. Conventional MPG: 35Charging Plug & 220V install $1,500 $1,500 Miles Driven Per Year: 12,000Total Powertrain $6,110 $7,650 $14,955 $18,285 Useful Life Years: 10Feebate/Tax Treatment Price of Electricity ($/kWh): $0.12Total Purchase Costs $21,390 $22,930 $30,235 $33,565 Miles per kWh (of nominal battery capacity): 4.5HEV Battery Size (kWh): 4Fuel $6,453 $4,106 $616 Battery Pack Cost ($/kWh), EV: $600Electricity $1,365 $1,606 Useable battery capacity, EV: 90%Maintenance $5,019 $6,023 $6,023 $2,509 Level II Charging Plug Cost: $1,500Total Operating Costs $11,471 $10,129 $8,004 $4,115 Desired PHEV all-electric range (Miles): 40Useable battery capacity, PHEV: 65%Net Ownership Benefits $0 $0 Desired BEV Range (Miles): 100Battery Recycle Credit $0 $0 Conventional Maintenance Costs per Year: $1,000HEV Maintenance Costs per Year: $1,200Total Net Present Cost $32,861 $33,059 $38,239 $37,680 PHEV Maintenance Costs per Year: $1,200BEV Maintenance Costs per Year: $500Cost Differential with Conventional Car $197 $5,377 $4,819 Avg. HEV/PHEV MPG using only fuel: 55Percent of PHEV miles driven in electric-only mode: 85%Implied Battery Size (nominal capacity) 13.68 24.69 Note: battery pack sizes for PHEV and BEV are automaticallycalculated from desired range, miles per kWh, and useablebattery capacity assumptions.33

Appendix B: Monte Carlo Simulation and Sensitivity AnalysisSimulation Inputs:EV Scenario Analysis - InputsName Graph Min Mean Max 5% 95% Distribution TypeFuel Price per Gallon: $2.50 $4.50 $6.50 $2.70 $6.30 UniformBattery Pack Cost ($/kWh),PHEV:$150 $300 $450 $191 $409 BetaDiscount Rate: 5% 15% 25% 6% 24% UniformAvg. Conventional MPG:30.29567 34.99993 77.61208 31.72219 40.67329 Log NormalMiles Driven Per Year: 9,049 12,000 23,398 10,364 14,209 Log NormalBattery Pack Cost ($/kWh),EV:$150 $300 $449 $191 $409 BetaLevel II Charging Plug Cost: $859 $1,500 $2,187 $1,253 $1,747 NormalConventional MaintenanceCosts per Year:$527 $1,000 $1,437 $836 $1,164 NormalHEV Maintenance Costs perYear:$664 $1,200 $1,733 $1,003 $1,397 NormalPHEV Maintenance Costs perYear:$561 $1,200 $1,712 $1,003 $1,397 NormalEV Maintenance Costs perYear:$277 $500 $722 $418 $582 NormalAvg. HEV/PHEV MPG usingonly fuel:50.38216 54.99996 98.15335 51.72213 60.67326 Log NormalPercent of PHEV miles drivenin electric-only mode:75% 85% 95% 76% 94% UniformElectricity Price/kWh: $0.10 $0.15 $1.28 $0.11 $0.23 Log Normal34

Notes: The simulation was run with 100,000 iterations. In this Appendix, “EV” refers to “BEV” as defined inthe text. If a model variable does not appear in the above table, it was fixed at the value given in Appendix A.Simulation Output Summary:EV Scenario Analysis - OutputsName Graph Min Mean Max 5% 95%Cost Differential withConventional Car / HEV($10,597) ($1,582) $4,532 ($4,199) $582Cost Differential withConventional Car / PHEV($13,498) $972 $17,823 ($4,014) $5,110Cost Differential withConventional Car / EV($21,777) ($3,863) $17,102 ($10,310) $1,445Note: The simulation was run with 100,000 iterations. In this Appendix, “EV” refers to “BEV” as defined in thetext.35

Detailed Simulation OutputsSimulation Output for Cost Differential with Conventional Car / EVSimulation Summary InformationNumber of Simulations 1Number of IterationsNumber of Inputs10000014Number of Outputs 3Sampling TypeLatin HypercubeRandom # GeneratorRandom SeedMersenne Twister1981150932Summary Statistics for EV Cost DifferentialStatisticsPercentileMinimum ($21,777) 5% ($10,310)Maximum $17,102 10% ($8,675)Mean ($3,863) 15% ($7,604)Std Dev $3,559 20% ($6,772)Variance 12669864.68 25% ($6,067)Skewness ‐0.462419345 30% ($5,471)Kurtosis 3.169567001 35% ($4,931)Median ($3,534) 40% ($4,443)Mode ($3,495) 45% ($3,978)Left X ($10,310) 50% ($3,534)Left P 5% 55% ($3,110)Right X $1,445 60% ($2,681)Right P 95% 65% ($2,250)Diff X $11,755 70% ($1,804)Diff P 90% 75% ($1,336)#Errors 0 80% ($821)Filter Min Off 85% ($233)Filter Max Off 90% $476#Filtered 0 95% $1,445Regression and Rank Information for Key InputsRank Name Regr Corr1 Fuel Price per Gallon: ‐0.584 ‐0.5842 Discount Rate: 0.538 0.5253 Battery Pack Cost ($/kWh), 0.464 0.4724 Electricity Price/kWh 0.185 0.1375 Avg. Conventional MPG: 0.171 0.1536 Miles Driven Per Year: ‐0.168 ‐0.1467 Conventional Maintenance‐0.147 ‐0.1398 EV Maintenance Costs per Y0.073 0.0669 Level II Charging Plug Cost: 0.042 0.04236

Detailed Simulation OutputsSimulation Output for Cost Differential with Conventional Car / PHEVSimulation Summary InformationNumber of Simulations 1Number of IterationsNumber of Inputs10000014Number of Outputs 3Sampling TypeLatin HypercubeRandom # GeneratorRandom SeedMersenne Twister1981150932Summary Statistics for PHEV Cost DifferentialStatisticsPercentileMinimum ($13,498) 5% ($4,014)Maximum $17,823 10% ($2,745)Mean $972 15% ($1,929)Std Dev $2,793 20% ($1,305)Variance 7799729.231 25% ($773)Skewness ‐0.458344807 30% ($315)Kurtosis 3.284463921 35% $107Median $1,208 40% $484Mode $1,105 45% $858Left X ($4,014) 50% $1,208Left P 5% 55% $1,551Right X $5,110 60% $1,895Right P 95% 65% $2,239Diff X $9,125 70% $2,596Diff P 90% 75% $2,971#Errors 0 80% $3,363Filter Min Off 85% $3,815Filter Max Off 90% $4,358#Filtered 0 95% $5,110Regression and Rank Information for Key InputsRank Name Regr Corr1 Fuel Price per Gallon: ‐0.674 ‐0.6902 Battery Pack Cost ($/kWh), 0.388 0.3933 Discount Rate: 0.358 0.3364 PHEV Maintenance Costs p 0.224 0.2235 Avg. Conventional MPG: 0.218 0.1936 Electricity Price/kWh 0.200 0.1507 Miles Driven Per Year: ‐0.198 ‐0.1758 Conventional Maintenance‐0.187 ‐0.1769 Percent of PHEV miles drive‐0.063 ‐0.05610 Level II Charging Plug Cost: 0.053 0.05111 Avg. HEV/PHEV MPG using o ‐0.015 ‐0.01337

Detailed Simulation OutputsSimulation Output for Cost Differential with Conventional Car / HEVSimulation Summary InformationNumber of Simulations 1Number of IterationsNumber of Inputs10000014Number of Outputs 3Sampling TypeLatin HypercubeRandom # GeneratorRandom SeedMersenne Twister1981150932Summary Statistics for HEV Cost DifferentialStatisticsPercentileMinimum ($10,597) 5% ($4,199)Maximum $4,532 10% ($3,509)Mean ($1,582) 15% ($3,064)Std Dev $1,467 20% ($2,730)Variance 2152310.638 25% ($2,452)Skewness ‐0.515133305 30% ($2,217)Kurtosis 3.684076543 35% ($2,007)Median ($1,456) 40% ($1,813)Mode ($1,472) 45% ($1,631)Left X ($4,199) 50% ($1,456)Left P 5% 55% ($1,286)Right X $582 60% ($1,116)Right P 95% 65% ($940)Diff X $4,781 70% ($763)Diff P 90% 75% ($574)#Errors 0 80% ($367)Filter Min Off 85% ($137)Filter Max Off 90% $152#Filtered 0 95% $582Regression and Rank Information for Key InputsRank Name Regr Corr1 Fuel Price per Gallon: ‐0.519 ‐0.5252 HEV Maintenance Costs pe 0.428 0.4173 Avg. Conventional MPG: 0.415 0.3914 Conventional Maintenance‐0.356 ‐0.3445 Discount Rate: 0.291 0.2746 Miles Driven Per Year: ‐0.201 ‐0.1817 Battery Pack Cost ($/kWh), 0.182 0.1818 Avg. HEV/PHEV MPG using o ‐0.176 ‐0.15838

Belfer Center for Science and International AffairsHarvard Kennedy School79 JFK StreetCambridge, MA 02138Fax: (617) 495-8963Email: belfer_center@harvard.eduWebsite: http://belfercenter.orgCopyright 2011 President and Fellows of Harvard College

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